Easing the burden on the board of directors: D&O liability insurance as a coping mechanism

The members of the Board of Directors are faced with numerous decisions on a daily basis as members of the body charged with the management and representation of the company. The discretion that directors exercise in the course of their duties carries considerable weight as they may be liable to the company itself, the company’s shareholders or creditors. This essentially creates a need for a mechanism to allow the board of directors to exercise their unfettered discretion and allow them to participate in decisions affecting high value transactions. Given the ever-expanding nature of companies and the size of mergers and acquisitions, the associated risks continue to increase, making directors and officers liability insurance (D&O insurance) more common.

Under what circumstances does the liability of the members of the board of directors arise under Turkish law?

The members of the board of directors shall be liable against (i) the company (ii) the shareholders and (iii) the company’s creditors, in case they violate their legal obligations or their obligations defined in the company’s articles of association. Members will be liable for damages in proportion to their fault under the doctrine of comparative liability under Turkish Commercial Law.

It should also be noted that the liability of the members of the board of directors is not only governed by the Turkish Commercial Code (Law No. 6102) (TCC), but also under numerous codes and laws such as the Capital Markets Act, the Tax Procedure Act, the Labor Code and the Enforcement and Insolvency Code. Thus, given that they may even be liable for the company’s public debts, the potential liability of board members is quite extensive.

The liability of the members of the board of directors may give way to excessive claims for compensation. This, in turn, may cause directors to refrain from making decisions on high-value deals. A need has therefore arisen to provide some certainty for the board of directors faced with such decisions. The legal market’s answer to this need for security appears in the form of D&O insurance.

Can the liability of the Board of Directors be insured under Turkish law?

D&O insurance, which is common in countries such as the United States, Germany, Switzerland and the United Kingdom, is gaining popularity, albeit slowly, in Turkey. Insurance companies in Turkey issue insurance policies insuring the damages that may arise from the actions or transactions carried out by the members of the board of directors or employees in the course of their duties towards the company, shareholders or creditors including public authorities.

Although D&O insurance is not specifically regulated by the TCC, there are various references to D&O insurance. For example, according to Article 361 of the TCC, if the damage that the members of the board of directors can cause to the company due to their fault in the performance of their duties is insured at a cost of more than 25% of the company’s capital, this must be announced . in the Capital Markets Board Bulletin and the Exchange Bulletin in Publicly Traded Companies. On the other hand, the TCC contains no express regulation regarding D&O insurance, insureds, and policy coverage and contents. As such, D&O insurance in Turkey has developed primarily through practice.

Insurance companies may define (i) the insured, (ii) the risk, (iii) the coverage as follows.

Insured: The term insured means the person whose interest is insured and the beneficiary of the insurance. The insured may be (I) the company or (ii) the members of the board of directors themselves depending on the type of insurance.

(i) In case the company is insured, the company itself will be protected against the damages which it may suffer from the acts done by the board of directors.

(ii) In the event that the members of the board of directors are insured, then they will be the parties insured against claims for compensation or administrative fines arising from the performance of their duties as members of the board of directors.

Risk: Broadly speaking, the risks covered by D&O insurance policies include damages arising in the course of the directors’ duties, excluding those resulting from the directors’ willful misconduct, such as intentional fraud. These risks may arise in situations such as mergers and acquisitions, initial public offerings or a deterioration in the company’s financial condition.

Insurance: The insured himself or the company can apply in case it compensates the person acting as a director. In practice, insurance coverage includes costs such as litigation fees, attorneys’ fees, compensation claims made by shareholders or creditors, and administrative fines.

However, it should be noted that no policy is identical to the next, as different policies may have different scope and coverage.

In summary, the ever-expanding nature of companies leads to an increase in the potential liability of the board of directors in a proportionate manner. Therefore, there is a need to provide for the members of the board of directors. While D&O insurance is becoming more popular around the world, it is expected to become a growing trend in Turkey as well in light of mergers and acquisitions increasing both in number and size.

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